After benefitting from a surge in demand and stronger pricing, energy tube-and-pipe producers may be facing a reversal of fortunes.
For now, oil and gas drilling activity remains strong enough to support a steady consumption of oil country tubular goods (OCTG), ensuring healthy volumes for domestic pipe mills and distributors, market participants report.
The structural tubing, mechanical tubing and standard pipe mills have not received a similar lift in 2017, but those segments do have something in common with the energy-related steel providersa worrying influx of import competition.
While domestic OCTG mills devoted most of their endeavors to increasing volumes to catch up with burgeoning demand from the oil patch, their rivals in South Korea and elsewhere shipped a record volume of material into the United States.
A total of 348,430 tonnes of OCTG imports poured into the U.S. in July, almost 100,000 tons of which came from South Korea, according to U.S. Commerce Department license data. Thats on top of a total of 291,776 tonnes of overseas oil-country goods which entered in June. Julys tally amounted to almost triple the volume of OCTG imports logged the same month a year ago.
The latest spike in OCTG imports began in April, when the total also topped 300,000 tonnes, while May weighed-in somewhat lighter at around 234,000 tonnes.
Line pipe imports also have climbed, hitting a lofty 189,405 tonnes in July, Commerces license data showed. Overall, steel imports are flooding into the U.S. at the fastest rate in over two years. Even considering the 2017 peak consumption rate for steel in the oil- and gas-producing basins, the foreign goods represent about three-fourths or more of per-month demand.
Its an unsustainable influx, said Paul Vivian, principal at St. Louis-based Preston Publishing Co.
During the dog days of summer, crude oil was stuck below $50 per barrel, the growth in the number of active oil and gas rigs slowed and energy companies warned that they were cutting their production budgets.
Vivian said the various market statistics add up to a foreboding outlook for the domestic energy-tubular mills.
A market like OCTG cannot continue to exist for long with 300,000 tons of imports coming in month after month, Vivian said.
Those level are just too high and its a total disregard for the market. Theyre holding the price down, he said. Consumption at the rig level today is at the 400,000-ton level, and when youre importing 300,000 tons a month, what does the domestic industry have left?
Mountainous import volumes also have plagued the non-energy U.S. tube and pipe mills. Zekelman Industries chairman and chief executive officer Barry Zekelman has pointed out that the electric-resistant-welded (ERW) segment faces the greatest proportion of competition from imported goods, with much of it allegedly unfairly traded. Imported material accounts for as much as 60- to 70-percent of certain ERW markets.
In an August blog post, Zekelman Industries vice president of marketing and business development Jelani Rucker said thoseimports are robbing thousands of jobs from American companies. He said a Section 232 action by President Trumps administration is justified, as tube mills products are necessary to secure the countrys energy infrastructure (and) make critical components to supply the nations defense systems and a robust steel industry is needed for Americas economic security.
Furthermore, (there was) news that in June 2017, steel imports entered the U.S. at a record level of 2.5 million tons, including 750,000 tons of pipe and tube, which captured over 30 percent of the finished-steel market share, Rucker wrote. The industry has not seen these levels since the Asian financial crisis of the late 1900s when surging imports nearly decimated the U.S. steel sector.
Anticipation of a potential Section 232 remedy helped lift some domestic steel prices higher over the summer. From mid-June to early August, AMMs assessment of hot-rolled coil prices gained about 8 percent, settling at $31.28 per hundredweight ($625.60 per ton) when AMMs new Hot-Rolled Coil Index made its debut.
In response to the substrate price hikes, ERW mills in July announced price increases for hollow structural sections, standard pipe and some mechanical tubing. While U.S. domestic mills urged their government to place quotas and/or tariffs on overseas producers, at least some held off making large strategic bets until the specific results of Trumps threats were confirmed.
As the U.S. economic expansion entered its ninth year, the structural-tubing mills are being buoyed by a relatively strong commercial construction market. Mechanical tubing makers reported more tepid demand but were encouraged by the potential for one more leg up in industrial and manufacturing activity. All of the mills would welcome a burst of government infrastructure spending.
Paul Kasperski, owner of mechanical tubing producer Epix Tube in Trotwood, Ohio, said his ERW operation did not base any production decisions this year on anticipated protectionist policies.
We do not speculate on the trade curbs, Kasperski said. You can get rich quickly, but you can go out of business and I do not want to put us in that position. Were building everything to order.
Back in the oil patch, imports were helping distributors fill the drillers voracious appetite for certain sizes of tubing and casingas well as line pipe, which was subject to a separate Trump administration review.
From the historic low of 404 rigs in May 2016, the total number of oil and gas rigs in the United States jumped to 958 by July 2017. Thats an increase of 554, or 137 percent. Year-to-date, the U.S. rig count rose by exactly 300, or 46 percent, through July.
However, the Baker Hughes tally declined three out of four weeks in July and August, pointing to a leveling off after the 14-month rally.
Brandon Dewan, president and chief executive officer of Houston-based distributor Eagle Pipe LLC, estimates the OCTG consumption rate to be about 479 tons per rig per month for 2017. Thats more than double the rate in 2005 and is emblematic of the horizontal drilling and other sophisticated strings designs developed over that period.
Any estimate of casing and tubing demand must consider that higher consumption rate. At the same time, analysts and investors viewed the energy market as currently well-supplied with the fossil fuels, both in North America and globally.
The expectation in the market right now is that the rig count is going to do some leveling off, and the oil price has been stagnant, Dewan said. It should be noted, however, that the addition of 300 rigs in the first seven months of 2017 is a very good increase for the year and should keep the mills producing at a healthy level.
West Texas Intermediate crude oil was mostly below $50 per barrel between May and August. As of early August, NYMEX natural gas had lost one-quarter of its value in 2017 and was down near $2.80 per million British thermal units.
With crude mostly in the $40s this summer, energy companies reconsidered their investment commitments. Anadarko Petroleum, ConocoPhillips, Pioneer Resources, Hess and other large and small producers said they would slash capital spending by a combined hundreds of millions of dollars.
Much of that reduction will take place in shale formations. Pioneer, notably, said it was cutting back or postponing well completions and related activity in the Permian Basin, where much of the 2016-17 growth took place. Timothy Dove, Pioneers president and chief executive officer, said the retrenchment decision was made in light of the current commodity price environment.
Dewans estimate of 479 tons of steel consumption per rig per month actually represents a downward revision from his earlier forecast of 526 tons. The drop reflects less-efficient production as a result of more inferior rigs, less-desirable short-term contracts and less experienced personnel.
Vivian said the announced cutbacks could hold current drilling levels steady, at least, therefore maintaining the current demand rate for OCTG. While the large drilling companies garner most of the attention, its the smaller-scale drillers who are apt to get scared away during periods of weak commodity prices. The scale of their cutbacks arent as easily recognizable but can pile up and translate into hidden trouble for the OCTG providers.
Those people will continue to drill if oil is at $50, Vivian said. But if its $40, sayonara.
For now, the U.S. and Canadian mills are as busy as can be, even after restarting production lines and adding shifts throughout 2017. During Vallourecs second-quarter earnings conference call, Nicolas de Coignac, the head of the French companys North American operations, said increased domestic production should make imported goods less competitive.
De Coignac also pointed that per-rig steel consumption has soared in recent years and noted that newly completed rigs can start producing fast due to the advanced technologies. That translates into volumes added to Vallourec USAs order book.
The seamless mills (are) filled up. Today, nearly all the plants are running at full capacity. Some of the ERW mills are resuming activity, which we see from our competitors, de Coignac said during the quarterly earnings conference call. We will see some of the imports being replaced by domestic supply.
As of May, the OCTG supply in the United States stood at 41-percent domestic and 59-percent import, Dewan said. The seamless share was 58-percent versus 42-percent welded goods.
Just four days after being sworn in as president, Trump called for all new pipelines and refurbishments to use line pipe that is made in the United States from the melt stage through rolling and coating. The president initially gave the Commerce Department six months to formulate the specific policy to execute the order.
The proclamation triggered a debate between domestic steel and U.S. oil and gas interests as to whether and how the requirement should be instituted, amid expectations that pipeline construction would be accelerating in the coming years because Trump favors smoothing the regulatory skids for an expansion in energy infrastructure.
Demand for and supply of line pipe rose in the first half of 2017, with full-year supply and consumption levels likely to experience a major increase from 2016 levels, according to Dewan. Pricing also strengthened, with AMMs assessment of domestic X52 gaining more than 25 percent in the two months following Trumps call for all-US steel in pipelines.
In addition to the capacity needed to accommodate the new oil and gas production, Dewan said hundreds of thousands of miles of gathering and transmission pipelines are between about 50- to 70-years old and will need to be replaced. All of these factor explain the rally. Prices for some items have jumped about 40 percent.
In addition to inventory constraints making life difficult, domestic mill lead times have fallen into a groove with deliveries in the approximately four-months range and imports in the six- to eight-months range in most cases, Dewan said.
For large OD projects, the mills are even out to the first half of 2018, he noted. Word to the wise: Plan as far ahead as possible for your line pipe needs over the next year.
The energy markets also will be watching very closely how the Organization of the Petroleum Exporting Countries (OPEC) enforces its bid to curb production along with key non-OPEC partners including Russia.
No matter what they are able to achieve in the short term, Dewan said the secular decline in some overseas oil supply centers, coupled with the ingenuity of U.S. drillers in extracting oil and gas while reducing their breakeven costs, points to U.S. producers gaining global market share and using more and more steel tubulars.
Places like Saudi Arabia have peaked out, Dewan said. The U.S. is going to be a big player in terms of increasing production.